Crown law “covered off” under-fire council’s legal exposure

A South Australian council was assured by a senior state bureaucrat that Crown law had legally ‘covered off’ a controversial power deal, 20 months before the same council was found guilty of “serious maladministration” over agreeing to sign the agreement without going through its internal procurement processes.

Aug 31, 2018, updated Aug 31, 2018
The opal fields at Coober Pedy. Photo: AAP/Dave Hunt

The opal fields at Coober Pedy. Photo: AAP/Dave Hunt

An Ombudsman’s investigation into the 20-year power procurement deal between the council and energy company EDL concluded the council was guilty of “serious maladministration”, primarily because it “did not observe established procurement and prudential processes and did not satisfactorily demonstrate that the transaction presented value for money”.

The council has argued it was under pressure from the State Government to sign the deal, the risk arising from which is borne by the taxpayer through Government subsidies of electricity costs for remote communities.

Ombudsman Wayne Lines rejected the council’s view and found the Government had not committed maladministration in its involvement. However, he did criticise the then Department for State Development for failing to demonstrate in briefings to then Energy Minister Tom Koutsantonis that the agreement executed by the council was “fairly and reasonably priced when considered against comparable projects”.

InDaily can now reveal that a senior Government bureaucrat, Nick Smith, told the council nearly two years ago that the Crown Solicitors’ Office had gone over the deal to make sure all of the council’s legal obligations had been met.

In a recording of the meeting between Smith and council representatives, heard by InDaily, Smith says he negotiated the deal with EDL on behalf of the council.

InDaily understands the meeting, which coincided with a community cabinet meeting in Coober Pedy, was held in November 2016 – eight months after the council had executed the power purchase agreement with EDL, despite deep and long-standing internal misgivings about its cost and value for money.

The discussion between angry council members and an increasingly exasperated Smith reaffirms the extent to which the State Government was involved in the deal, from its very beginnings.

Smith told the meeting that the State Government not only negotiated the deal on behalf of the council, but he believed it had covered the council’s legal obligations.

“I did the vast majority of the negotiations of the PPA, on your behalf, because effectively the State Government bears all of the financial risk,” Smith said.

He said the deal was “largely cost neutral” to the State Government and asserted it came about after months of “heavy, heavy negotiations” between EDL, the Federal Government’s renewable energy agency, ARENA, which subsidised the development with an $18 million grant, and the state Department of Treasury and Finance.

While Smith conceded the deal had not been subjected to an open tender process – a key concern of the council – he said: “The reality is that we pick up the tab on it. If we’re comfortable with it, council shouldn’t have any concerns about it.”

Because the Government signed both a letter of comfort and a deed of grant underwriting the deal, the arrangement had to go to Cabinet.

However, under close questioning from council members, Smith admitted that the State Government did not see the commercial documentation that showed the rate of return for EDL over the life of the deal.

He said the Government had to take it on EDL and ARENA’s advice that “they weren’t making a windfall profit out of it”, adding that Treasury and Finance conducted its own “financial due diligence” on the arrangement and that he was confident that the return on investment for EDL would be within normally expected parameters.

“Crown Solicitors Office were extensively involved in this from day dot to make sure that we were covering off on your legal obligations as well as ours,” he said. “Because if you didn’t comply with your legal obligations, you create financial risk for us.”

The Ombudsman’s report revealed that Crown law advice was sought in relation to the Government’s side of the deal – but it doesn’t reveal in explicit terms that the Government’s lawyers had vouched for the council’s obligations.

The advice sought, according to the Ombudsman’s report, was for the purpose of “ensuring that the risk allocation between [the council] and [EDL] is commercially reasonable given the State is essentially underwriting, or guaranteeing, the Council’s liabilities under the PPA”.

In his report, Lines he believed that “some criticisms notwithstanding, I am ultimately satisfied that the department undertook reasonable endeavours to satisfy itself that subsidising the project represented value for money to the State”.

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The Ombudsman argued that, despite the State Government conducting due diligence on the deal and carrying much of the risk, the council erred by failing to put the agreement through its procurement processes, among a range of other administrative failures.

Acting Coober Pedy mayor Paul Athanasiadis told InDaily this week that the council believed it had been treated unfairly by the report, given the State Government’s close involvement in the deal and the risk to taxpayers.

“I’m stunned that the council is to blame when the underwriter who has done the due diligence on this project is the State Government,” he said.

In response to questions from InDaily, a State Government spokesperson said: “The Ombudsman’s report found that the SA Government was not responsible for the negotiation of the Coober Pedy Council’s energy deal. Further, that Mr Smith was a compelling witness who answered questions directly.”

The Ombudsman specifically castigated the council for “substantial mismanagement of public resources because they caused the council to commit to expend in excess of $100 million in circumstances where the council did not observe established procurement and prudential processes and did not satisfactorily demonstrate that the transaction presented value for money.”

Deputy Premier Vickie Chapman, while in opposition, had expressed concern about the EDL deal, particularly the lack of competitive tender and has asked the Auditor-General to investigate.

The council is now waiting on another Auditor-General’s report, ordered by Koutsantonis when he was Treasurer, into its financial performance and reporting.

What’s it all about?

Coober Pedy council essentially acts as the energy retailer for the town, with the South Australian taxpayer exposed via subsidies the State Government provides to the council to ensure electricity prices are kept on par with those in the city.

EDL, which ran the town’s old diesel generation, has upgraded the infrastructure to include a greater mix of renewables and battery storage. After the system was switched on in July last year, EDL argues it passed several significant milestones, including running entirely off renewable energy for more than 24 hours.

The council, though, has remained unhappy with the scope of the deal and its cost.

Despite approving the project, the council repeatedly raised concerns with EDL and the State Government about the potential cost to the community and the lack of a tender process.

A consultant, engineer Graham Davies from Resonant Solutions, who ran as an SA Best candidate for the state seat of Waite, advised the council that the deal would cost $85 million more than it otherwise would have, if had been put to the open market – a contention rejected by the Government.

Council members later said they felt pressured at a January 2016 meeting to approve the deal or they might lose the $18 million grant to the project from the Federal Government’s renewable energy agency, ARENA. Members have also contended they felt pressured by the then-Labor Government to approve the deal – a claim refuted by Labor and given short shrift by the Ombudsman in his report.

Topics: Coober Pedy
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